Barclays Bank has been fined £37.7m by the UK Financial Conduct Authority (FCA) for failing to protect clients’ custody assets worth £16.5bn, which resulted in clients risking incurring extra costs, lengthy delays or losing their assets if Barclays had become insolvent.
This is the highest fine ever imposed by the FCA or its predecessor the FSA for client assets breaches, reflecting “significant weaknesses” in the systems and controls in Barclays’ investment banking division between November 2007 and January 2012 across various products and business lines, although the regulator did not disclose the types of products involved.
According to the FCA, Barclays’ breaches arose from significant weaknesses in its systems and controls and a historical focus on business lines and products traded, rather than giving adequate consideration to which legal entity was conducting the relevant business.
“Safeguarding client assets is key to maintaining market confidence if firms fail – Barclays’ lack of focus on the rules was unacceptable,” said David Lawton, the FCA’s director of markets. “Our ongoing scrutiny of firms’ compliance reflects the importance of the regime, which protects custody assets worth £10 trillion held in the UK.”
Post-Lehman
The FCA said its rules are aimed at protecting client assets if a firm becomes insolvent, and that Barclays failed to properly apply these rules when opening 95 custody accounts in 21 countries.
As a result, Barclays’ records did not correctly reflect which company within its investment banking division was responsible for the assets in the accounts. Barclays also failed to set up appropriate legal arrangements with these companies.
“Barclays failed to apply the lessons from our previous enforcement actions, numerous industry-wide warnings, and exposed its clients to unnecessary risk,” said Tracey McDermott, FCA director of enforcement and financial crime. “All firms should be clear after Lehman that there is no excuse for failing to safeguard client assets.”
According to the FCA, these lapses were compounded by flaws in account naming or incorrect data that suggested assets belonged to Barclays instead of its clients. This breached the FCA’s client asset rules (Cass) and requirements that firms should have adequate management, systems and controls (Principle 3) and properly safeguard clients’ assets (Principle 10).
Following the insolvency of Lehman Brothers International (Europe) the UK government introduced the special administration regime (SAR) which was first used in the failure of MF Global (UK) Ltd and has since been used in a number of other administrations, including Pritchard Stockbrokers, the custodian of defunct structured products provider Merchant Capital.
Barclays agreed to settle at an early stage, qualifying for a 30% discount. Without this, the FCA would have imposed a penalty of £53,921,619.
Click the links to read the FCA’s Final Notice, the FCA Principles and the FCA Client Asset Rules.
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